Should you pay GST on first 20 Lakhs of turnover in first year in which you cross 20 Lakhs?

[Shripada Hegde]

Under GST, one is not compelled to register if his turnover in that financial year is less than 20 Lakhs. Law requires the supplier to register once his turnover crosses 20 Lakhs and start paying taxes therefrom. However, in Karnataka there have been instances where officers have demanded tax even on the first 20 lakhs of turnover effected in the year in which a supplier crosses the threshold for registration. In this article an attempt is made to analyze the validity of such demands.

Tax is levied under Section 9 on all supplies (irrespective of turnover) but the responsibility/liability to pay the tax levied is on the “taxable person”. Section 9(1) states there shall be levied a tax called central goods and services tax on all intra-State supplies of goods or services or both AND shall be paid by the taxable person. Hence, the liability to pay tax is on the taxable person and no one else.

Term ‘taxable person’ has been defined in Section 2(107) as “a person who is registered or liable to be registered under section 22 or section 24”. There can be no discussion that if the supplier is required to compulsorily register under Section 24, he becomes a taxable person and he will have to pay tax right from the first rupee of his turnover. Same goes for the persons who have voluntarily registered. However, as far as the persons liable to be registered under Section 22 are concerned, tax officers seems to adopt a view that once you cross the threshold limit of 20 Lakhs you are supposed to pay tax on entire turnover including even the first 20 Lakhs. This approach seems to be wrong if the GST Act is looked into as a whole and the provisions are construed harmoniously.

Section 25(1) prescribes that application for registration should be filed within 30 days “from the date on which he becomes liable to registration”. We can also refer Rule 10(2) wherein it is prescribed that the registration shall be effective from the date on which the person becomes liable to registration. As such, unless the threshold of 20 lakhs is breached, there is no requirement for even to register. When there is no liability to register till the supplier breaches the threshold for registration, he cannot be considered a ‘taxable person’ for the turnover effected till such date. If one is not a taxable person he is not liable to pay tax.

Attention is also drawn to Section 31(3) wherein the newly registered persons have been given option of issuing revised invoices. Section 31(3)(a) reads as under

“(a) a registered person may, within one month from the date of issuance of certificate of registration and in such manner as may be prescribed, issue a revised invoice against the invoice already issued during the period beginning with the effective date of registration till the date of issuance of certificate of registration to him”

From the above it may please be seen that revised invoice provisions are applicable to only those invoices which are issued from the date when supplier becomes liable to register to the date on which registration certificate is issued. This provision is enacted to enable the supplier to issue tax invoice for the taxes collected from the date on which he becomes liable to be registered. If legislature intended to collect tax even on the turnover upto the date on which supplier becomes liable to be registered, the option of issuing revised invoice would have been given from starting of the Financial Year in which he crosses the threshold limit. It is not done only because there is no requirement to pay tax till the date on which supplier becomes liable to be registered.

From the above it may please be seen that machinery provisions have been given only to cover transactions which happen after crossing the threshold limit. This indicates that tax is payable only on transactions occurring after such threshold limit. Levy provisions are required to be construed harmoniously with the machinery provisions.

GST is an indirect tax. The incidence of tax is on the recipient of supply but the same needs to be collected and paid to Government by the supplier. Given this nature of GST, we can understand the applicability of tax on turnover before breaching the threshold limit of 20 lakhs. In any invoice issued for generating the turnover upto 20 lakhs, the supplier would not have charged GST since he was neither registered nor was liable to be registered. When case is such, if the provisions are interpreted to tax even the turnover before crossing 20 lakhs, it is not possible that the supplier goes back in time and collects such tax from the customer. Hence, any such interpretation will lead to absurdity as the law would be expecting something impossible to be performed as per the interpretation.

Section 32 restricts a person from collecting tax if he is not registered. Hence, if tax is demanded on even the first 20 Lakhs turnover, GST will no longer remain an indirect tax as the law would be asking the supplier to pay the tax, collection of which from the customers has been restricted by the very law.

We can also look at Section 22 of Karnataka Value Added Tax Act, 2003. In this section liability to register has been prescribed even if the dealer has reason to believe that his turnover would exceed 10 Lakhs. Under such provision a person would be required to anticipate his turnover and register. However, under GST no such requirement is prescribed. The law doesn’t use the term ‘anticipates to exceed’ but categorically uses the term ‘exceeds 20 lakhs’. From this it is clear that the law doesn’t expect a supplier to anticipate the turnover in advance and doesn’t expect the supplier to start collecting taxes from the first day of that financial year based on such anticipation.

Based on the above discussion, a clear view is possible to be formed that there can be no demand of tax on the turnover effected till the date on which threshold limit for registration (be it 20 Lakhs, 10 Lakhs or 40 Lakhs) is breached.

Any critical views or additional points are welcome.

Discussions to this article

[R Dylan]

Hi, This is a thoughtful article to read. Will the scenario change when a person already has interest income exceeding the registration threshold limit of Rs. 20,00,000/- and subsequently starts an outward supply of service in the middle of a Financial Year?